Economic opportunities accessible to women are primarily tied to financing, and lack of working space to a lesser extent. Studies show that women, though with less access to loans, are better loan performers in terms of repayment and society trickle-down effects. Those that do access microloans are stuck in their success as there are no avenues to transition into larger bank loans due to collateral and guarantor requirements and commercial banks have a loan appraisal systems largely incompatible with the needs of small business owners. EBR’s Mariamawit Gezahegn assesses the current financial environment as well as suggestions that are critical to gender equality and empowering women.
Six years ago, Ejig Daniel had a small vegetable store. The prospect of a bank loan to improve her business was an unimaginable reality. “I was in no position to take out a bank loan: I had no assets to offer as collateral nor did I have economically stable acquaintances that were willing to guarantee my loans.”
Informed by one of her customers, Ejig approached the Organization for Women in Self Employment (WISE). Targeting women entrepreneurs, WISE offers business development skills, financial literacy, cooperative management skills, and vocational training. Upon successful completion, clients become eligible for microloans and microinsurance services. Ejig enrolled in leather and garment design/ construction training amongst other foundational courses. She then joined a savings and credit cooperatives (SACCO) group and took out a loan without collateral or guarantors. Her group, with a ETB300,000 loan ceiling, allowed her to finance her leather and garment business which now employs 10 people on rotation.
Similarly, Selamawit Haddis, who was thriving to expand her traditional garment business, never attempted to take out a bank loan. “The collateral requirements are very high, the interest rates are too risky, and the payment time is too short.” As a result, she enrolled in WISE and tapped into a micro-financer for microloans.
Both Ejig and Selamawit have exemplary loan payment records at their microloan institutions. “Women have minimal default rates on their loans,” says Tsigie Haile, Founder and Director of WISE.
“Women’s familial economic benefit and high loan repayment rates makes them a productive investment target. If offered equitable support, they not only have the capacity to compete but triumph and prosper. Female-focused financial assistance levels the gender playing fields. It is not charity but rather a response to an unfair service provision process,” agrees Yohannes Solomon, Country Program Coordinator at Women’s Entrepreneurial Development Project (WEDP). WEDP has been working with 12 micro-finance institutions (MFIs) to train and provide microloans to female entrepreneurs. Since its inception in 2014, WEDP has disbursed ETB5.23 billion in loans to 18,145 clients. WEDP funds are acquired from a combination of World Bank investment (57.6Pct), World Bank revolving fund (13.1Pct), and the microfinance institutions’ own funds (28.8Pct). In December 2020, WEDP also signed a USD100 million agreement with the World Bank, mainly to finance women entrepreneurs and women in small and medium enterprises (SMEs). WEDP lends to women who have never accessed loans.
Loan investment patterns show that women often spend their loans on the intended business purpose, divergent to men. Women borrowers are also shown to cause cascading down benefits to their families.
Nonetheless, currently many women graduating from microloan providers such as WISE, WEDP, and MFIs are stuck and frustrated, as they reach the maximum loan ceiling with the loan providers. Both Ejig and Selamawit, have reached their limits of ETB300,000 and ETB500,000, respectively. Their businesses have now grown beyond the capacity of microloan providers such as MFIs and WISE.
“When businesswomen reach the ceiling capacity for small loans, they can graduate to larger loans albeit with collateral requirements. At that stage of their business, they will likely possess collateral and the confidence to borrow larger amounts from banks,” says Tsigie.
Mewardi Abdurahman, Alternative Finance and Partnership Division Manager at the Association for Ethiopian Microfinance Institutions (AEMFI), says the problem is related to MFIs’ capital structure. “MFIs allocate loans based on 1Pct of their total capital. This limits MFIs from availing finance to larger loan seekers. If clients need larger finance, they can register with other institutions that have comparatively higher loan ceilings.” Women constituted 2.2 million out of the total 4.9 million active borrowers that have taken out loans from MFIs in Ethiopia up to 2019. This indicates women are underserved even at MFIs, albeit to a lesser extent. “Despite women’s minority in microfinance access, they are interestingly considered the safer investment target. Female borrowers are proven to have a higher loan repayment rate compared to men. Their return rate is at 99Pct, proving they are a low-risk investment. As minimal default rates are crucial to MFIs’ sustainability, they have taken note of this trend. Some MFIs directly target female borrowers.”
Although thousands of micro and small businesses run by women graduate annually from the microloan level, there is no policy to bridge their transition from MFIs to banks. As a result, many women-owned businesses fail to become large enterprises. They start small and remain small, mainly due to an absence of financial acquaintances at all levels of businesses evolutions.
Currently, Both Ejig and Selam are trying to lobby for bank loans. Ejig has chosen Enat Bank for their female-friendly approach, promise of low interest, and omission of collateral requirements. However, she was still asked to post a small collateral and produce two loan guarantors. Despite the stable status of her business, finding people in her network willing to take the risk was a battle. “My bank experience was totally in contrast to what I expected, the entire process has now taken almost three years. I sometimes visit the bank daily. My business was strained for finance,” says Ejig. Finally, after accessing ETB250,000 from the bank, Ejig rented more space and hired additional staff. “After taking the loan, I was shocked to learn about the incremental payment process. The bank loan, which is very small and has a short repayment period, still did not help my business. But I learned that banks have excessively complicated processes.”
Yohannes suggests banks must have room for capable women entrepreneurs graduating from microloan providers. “MFIs are meant to serve low-income micro-entrepreneurs. Providing larger loans to medium enterprises takes capital away from those who just joined the institutions.”
There are two primary barriers in accessing loans from commercial banks: collateral prerequisite and guarantor requirements. While both these loan practices disadvantage all micro-entrepreneurs, women more keenly feel the impact. Women are not traditional asset holders thus eliminating their leverage for loan requests. Women also find guarantor requirements challenging.
For instance, between 2015 and 2017, second-level land title deeds were issued to 708,011 women jointly with their husbands and to 132,869 single women, according to the Ministry of Finance (MoF). This indicates there are very few women who have the collateral leverage to access bank loans.
“There is a shared community perception that female-owned small businesses are riskier than male-owned. People do not have faith in the endurance of women-run businesses and hesitate to sponsor their loan applications. Without guarantors, women’s’ hopes of accessing financial loans from banks are extinguished,” said Ejig.
Commercial banks have a loan appraisal system that is largely incompatible with the needs of small business owners. Collateral is a definitive guarantee against loan defaults. Though valid, such risk aversion excludes low-income populations from financial access.
“Women are discouraged to apply for loans as they think their application would be rejected,” states a study by Ferdu Nega (PhD) etal, published by The Horn Economic and Social Policy Institute. “Women are risk averse and view loan acquisitions as a heavy burden. Titleship to property can boost women’s’ confidence to take out loans,” says Mewardi.
Another challenge for female microentrepreneurs is the requirement of minimum loan sizes by commercial banks, which is too high for women entrepreneurs’ small businesses. “Small business loans aren’t cost effective for banks” said Tekie Alemu (PhD), Economist and Financial Expert at Addis Ababa University. “The transaction cost of small business loans is not worth the relationship for commercial banks. As a profit driven business, banks cannot compromise profit to reach an underserved population. But there are also no banks capitalizing on women’s non-default customer-ship and hardworking nature. Without business rationale, women are still left without opportunities to lift themselves and their families out of poverty.”
Although the 41 MFIs in the country have been filling the demand for microloans, the four big MFIs, including Amhara, Addis, Dedebit, and Oromia Credit and Saving Institutions, are currently evolving and reestablishing as banks. The pioneering four established when MFIs started in Ethiopia 25 years ago and the capital of each has currently surpassed ETB1 billion and have provided 81.8Pct of the ETB54.6 total MFIs’ outstanding loans as of June 2019. The big four also constitute 82.8Pct of the total ETB15.7 billion of MFIs’ capital. The evolvement of these MFIs into banks will leave a huge vacuum for microloan takers. NBE allowed the transformation because MFIs could not provide bank services such as foreign currency commissioning in their current licensing state. Although there are close to 40 MFIs, most of them are new and have small capital and service portfolios.
In 2018/19 alone, a total of 110,253 new micro and small-scale enterprises were established nationally. Combined, these enterprises need close to ETB10 billion in loans per year, until they graduate and evolve to medium and large enterprises.
Ethiopia ranked 107th in The Economist Women Economic Opportunity report, placing in at 100th for women access to finance subindex. Only 10Pct of households in Ethiopia have access to formal credit. Over 70Pct of small and medium businesses owned by women in developing countries cannot get enough financing to grow.
Following the lack of access to credit in the formal economy, most women in business in Ethiopia also engage in the informal economy. While 41Pct of account holders borrowed money, only 11Pct borrowed from financial institutions, according to the World Bank. From the balance, 31Pct borrowed from family or friends and 8Pct borrowed from a saving club.
Reports of the Central Statistics Agency (CSA) also indicate that women constitute over 60Pct of informal economy operators. The informal economy in Ethiopia is estimated to constitute 2.2Pct of GDP.
Next to finance, lack of working space is the major factor pushing women to engage in the informal economy. Over 40Pct of women entrepreneurs engage in the informal economy due to lack of operating space for formal economic activities, according to various studies. There is a limited supply of lease land. The high price for leases and long waiting time means many businesses look to informal brokers. Most women entrepreneurs find the cost of acquisition of premises very high and are unable to expand their businesses. Women also face challenges in the negotiation and contract forming functions of acquiring premises.
Women prefer the informal sector mainly because 75Pct of informal businesses require minimal start-up capital, according to a study by the Addis Ababa Chamber and Swedish SIDA. Only 0.12Pct of the capital of women engaged in informal businesses is borrowed from banks, while 1Pct is from MFIs. The large pie comes from savings and borrowings and assistance from friends and families. Traditional schemes such as Iqub also have a significant role.
According to reports, one of the MDGs Ethiopia failed to achieve is Goal 5, which is promoting gender equality and empowering women. In 2014/5, the Ethiopian government planned to increase government expenditure for institutions benefiting women, the poor, and the vulnerable, from 17.3Pct share to GDP at the time to 22.6Pct by 2020. But there is no evaluation on the plan’s progression thus far.
Experts advise the government to primarily install new financing schemes for graduating women enterprises from microloans, which can be SME banks in this case. Government can also introduce regulations that forces banks to allocate dedicated capital and officers for medium-level women enterprises. Funds can be channeled into such schemes and provisioned to women who are beyond microloan ceilings but below commercial banks’ appetite. EBR
9th Year • September 2021 • No. 100